hard · FRM Part 2 Liquidity & Treasury Risk

Which critique BEST identifies the conceptual error in attributing the entire 250 bp to liquidity-buffer cost?

1. The spread should be measured against the bank's overnight funding rate, not its 5-year rate, so the carry cost is overstated only by the term premium embedded in the 5-year tenor.
2. Part of the spread compensates for the bank's own credit risk over a long tenor; the genuine liquidity-buffer cost is the spread of term funding over the matched-maturity risk-free rate, not over the short bill yield.
3. The 250 bp overstates cost because the buffer's bills can be repo'd to recover most of the funding outlay, so only the repo haircut times the funding rate is a true cost.
4. The carry is actually a benefit, not a cost, because holding HQLA reduces the bank's NSFR shortfall and thereby lowers its overall marginal funding spread by more than 250 bp.

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